One of the most difficult parts of any worthy real estate development or retrofit involves securing sufficient capital to fund the project. For a variety of reasons, the task is even more difficult when the venture requires multiple layers of capital sources.
While sufficient levels of traditional financing can be challenging at best to secure, there’s an innovative financing tool that can assist with such projects. It’s called Property Assessed Clean Energy, or PACE, financing.
Signed into Michigan law in 2010, PACE offers an affordable method to tackle the challenges of funding projects that economic development organizations face. PACE is being used in 18 counties and seven cities in Michigan, and the number is growing. To use this powerful tool, a city or county simply needs to “opt in.”
Here’s how the Property Assessed Clean Energy financing works:
PACE combines the flexibility of private financing with the assurance of payment through government participation. The program covers 100 percent of improvement costs through a long-term property tax assessment, instead of burdening the property owner with a short-term commercial loan.
The money building owners and developers now spend on energy and water can be redirected into improvements that add value to a building, a project, or a portfolio. PACE outperforms traditional financing in many ways, including:
• Boosting property values without negatively impacting the owners’ balance sheet.
• Financing is set up so no upfront costs are due from the owner.
• A transaction is, by definition, a self-imposed property tax assessment, so it easily transfers to any future owner.
• Since PACE is a property tax, tenants pay the tax on any triple-net lease.
• A transaction allows owners to preserve borrowing capacity for more essential business needs or their core mission.
• The fund is nonrecourse lending at its finest; the financing is tied more to the property than the property owner, so no guarantees are required.
• The PACE project financing comes from private investors, which eliminates complex bonding scenarios that are often burdensome and expensive for government entities to run.
• The program requires no taxpayer money to set up and operate.
In addition, a PACE project can include any infrastructure need that reduces energy or water.
Some of the most popular PACE-financed building systems include commercial boilers, lighting retrofits, windows, roofs, building systems and controls, elevators, escalators, HVAC systems, cooling towers and chillers, fume hoods, refrigeration, and solar, geothermal, and irrigation systems.
The following types of facilities can benefit from this type of financing: commercial properties, nonprofit buildings, multifamily dwellings, industrial, warehouses, hospitality, private schools and colleges, retail centers and shopping malls, hospitals, houses of worship, low-income housing, mixed-use projects, recreational facilities, and resorts.
Literally any project or property that isn’t government-owned or is considered a residence (four units or less) qualifies as a PACE project in Michigan.
A PACE-financed project can benefit all stakeholders involved in the transaction. Here’s how it works:
• Building owners access energy/water reductions that boost occupant comfort, health, and welfare while increasing building owners’ net income and building value — all with no upfront expenses.
• Tenants enjoy smaller utility bills and greater health, comfort, and welfare.
• Local communities enjoy upgraded buildings, greater economic growth, additional jobs, and a more productive business climate. These communities also enjoy neighborhoods and areas that are more sustainable and use less government infrastructure than before.
• Similarly, municipalities that are actively attracting corporations and jobs through tax incentives now have an additional financing tool that costs them nothing to use. In other words, PACE gives them a better chance to compete for new business.
Other states are enjoying success by offering PACE financing, and most economic development professionals see the program as another viable tool for economic growth and development. In turn, local government has no financial commitment other than to support its local businesses and nonprofits with a great resource funded by private capital.
PACE is working well in other states and in select communities in Michigan. To drive further economic growth, we need to open up more of the PACE market in the state and create more low-cost, flexible financing of real estate buildings and projects.
Robert E. Mattler is the managing director of Detroit-based PACE-Equity in Michigan. He speaks, writes, and reports about emerging sustainable real estate and development issues in Michigan and elsewhere.